Delaware Court Of Chancery Dismisses Breach Of Fiduciary Duty Claims In Connection With Two-Step Merger, Despite Finding Corwin Inapplicable
12/12/2017On November 30, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed breach of fiduciary duty claims against the board of Opower, Inc. (“Opower”) in connection with Opower’s acquisition by Oracle Corporation (“Oracle”). Van der Fluit v. Yates, C.A. No. 12553-VCMR (Del. Ch. Nov. 30, 2017). The Court found that the failure to disclose that certain executives who received transaction-related benefits were the primary negotiators of the transaction constituted a material disclosure violation. Therefore, the Court declined to rely on stockholder approval to cleanse the transaction under the doctrine of Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), because the tender was not fully informed. Nevertheless, the Court granted defendants’ motion to dismiss, concluding that plaintiff had failed to plead a non-exculpated claim for breach of the duty of loyalty.
Plaintiff brought claims in connection with Oracle’s acquisition of Opower pursuant to a two-step merger in which approximately 87.8% of Opower’s outstanding shares were tendered. Plaintiff alleged that the transaction resulted from an “unfair deal” that undervalued their shares. Plaintiff argued that the transaction should be judged under the entire fairness standard and that Corwin did not apply, because the transaction was directed by a “control group” consisting of the company’s co-founders and two venture capital funds that were early investors in Opower. Specifically, plaintiff contended that a pre-existing investor rights agreement (in place before the company’s IPO) and tender and support agreements related to the merger were sufficient to establish a control group.
The Court rejected plaintiff’s claim regarding the existence of a control group, explaining that (1) the investor rights agreement did not contain any “voting, decision-making or other agreements” bearing on the transaction; (2) the tender and support agreements merely reflected a “concurrence of self-interest” among certain stockholders; and (3) the alleged facts were insufficient to show a minority control group among Opowers’ two co-founders, who held only 30% of the outstanding stock at the time of the transaction. The Court nonetheless declined to dismiss plaintiff’s claims under Corwin because stockholders were not fully informed when tendering their shares. Specifically, the Court determined that the failure of the Opower board to disclose that the Opower representatives negotiating the deal were the company’s two co-founders—each of whom were to receive post-transaction employment benefits—constituted a material disclosure violation.
The Court concluded that the complaint should be dismissed for failure to state a claim for a breach of the duty of loyalty (as the directors were exculpated from duty of care claims by virtue of a charter provision adopted pursuant to 8 Del. C. § 102(b)(7)). The Court explained that in the context of a sale process, plaintiffs can plead that a board breached its duty of loyalty by alleging non-conclusory facts that “the majority of the board was either interested in the sales process or acted in bad faith in conducting the sales process.” The Court rejected the complaint’s various attempts to challenge the sales process, holding that a termination fee capped at 3.62% was “in line with Delaware case law” and that the company’s two-week market check was not unreasonable. The Court also noted that 87.8% of the Company’s outstanding shares tendered and that the process involved the retention of counsel, a fairness opinion from a financial advisor, a market check involving fourteen strategic buyers, meetings and information-exchanges with potential buyers, and discussion of various transaction possibilities at these meetings.